When having Excess Inventory is a Good Thing

Rarely do you read about supply chain scenarios in which companies stockpile excess inventory as a deliberate business strategy.  Perhaps the only example I can think of is the forward-buying techniques sometimes executed in the retail and pharmaceutical industries to take advantage of promotional prices from suppliers.  In this economy, however even the biggest risk takers might be reluctant to pursue such a price arbitrage strategy.  Inventory levels in the automotive, consumer electronics, apparel and luxury good segments have been at record levels for most the past several months.  In fact, economists have been monitoring finished goods inventory levels throughout the recession hoping they would be depleted to the point that buyers would place orders again.  Economic planners are hoping that such as buying cycle might be the catalyst for the start of a growth period.  There have been few signs of such a recovery yet, however, as most companies continue to take extraordinary measures to move assets and inventory off their books.   Nonetheless, there are scenarios in this economy in which supply chain planners are actually bulking up on inventory.  In fact, just this past week two of the world’s largest buying organizations are exploring programs to purposefully expand their safety stocks of inventory.

Toyota Stockpiles Parts

Rarely do you read about supply chain challenges at the world's largest automaker, Toyota.  In fact, Toyota is often studied by students and supply chain experts as the example of best-in-class manufacturing techniques.  However, even Toyota is not immune to the North American automotive crisis and the domino effect that could result from the Chrysler bankruptcy filing on Thursday or the potential GM bankruptcy in the next 30 days.  In recent years, Toyota has migrated much of the production for its US sales to North America.  Parts and materials are sourced both from established Japanese kereitsu partners as well as North American suppliers.  For example, approximately half of Toyota's 500 US parts suppliers are shared by GM.  It should be no surprise then that Toyota has established a war room to monitor the health of its North American supplier community.   In fact, the automaker has gone so far as to begin stockpiling parts in warehouses to prevent the disruption in manufacturing processes that might be caused by the failure of key suppliers. 

Toyota is not the only OEM concerned about supplier failure.  Ford Motor Company is perhaps at greatest risk due to the high degree of overlap between its vendor community and the suppliers utilized by Chrysler and GM.  Following Chrysler’s bankruptcy filing last week, Ford initiated an outreach program to its suppliers in order to assess any potential domino effect that might have resulted.  In fact, someone forwarded me one of the e-mail communications that Ford distributed to its suppliers through its marketplace/exchange partner Covisint.   As a supply chain professional, one cannot help but marvel at what is truly a peculiar set of circumstances which have evolved in the automotive industry.  At one end of the supply chain dealers are struggling with record-high, 100+ day inventory levels while at the other end of the supply chain, OEMs such as Toyota are deviating from established JIT processes to build up safety stocks.  Despite the intrigue posed by such anomalies to those of us who study supply chains, I think most would agree this is a situation that we would just assume not repeat ever again.

US Government Contemplates Vaccine Inventories

With the outbreak of the Swine Flu throughout North America, Western Europe and most recently Hong Kong, governments are focusing their attention towards pandemic preparedness.    Last week I read an interesting article in the Wall Street Journal about the inventory levels of flu vaccines being maintained by governments around the world.   Much like the Titanic oceanliner had less than half the necessary lifeboats to accommodate its passengers and crew, most government agencies have significantly less flu vaccine inventory on hand than would be required to respond to a widespread pandemic.   The UK and France appear most prepared with adequate vaccine supplies to treat 54% of the populations.  Japan could treat almost 30% of its population with its reserves.  The US, of course, has a much lower supply, which could only be utilized to treat 50 million people or 16% of its population.  Emerging markets such as India and Africa have very low inventories.  However, in the case of Swine Flu, most of these countries have not experienced an outbreak of the disease yet.

Swine Flu Outbreak as of May 3rd, 2009 – Source: Wikipedia

Pandemics are one of the rare situations in which the supply chain would benefit from having a massive safety stock of inventory on-hand.  And in the best case scenario, the inventory of vaccines such as Tamiflu would expire and need to be destroyed before it ever has to be used.  Vaccine inventories are expensive to maintain which is why many countries have under-stocked their reserves.  A better model would be to develop a model for rapidly producing high volumes of vaccines in order to respond just-in-time to pandemic outbreaks.  However, from my research the production of mass quantities of a vaccine is not possible in the timeframes necessary to respond to a public health crisis.  CDC officials have stated that even if all resources were focused on developing a Swine Flu vaccine today, the first output would not be available until September.  Furthermore, the manufacturing facilities used to produce a pandemic flu vaccine are the same as those used to produce seasonal flu remedies.  As a result, world health leaders would be forced to lower the output of vaccinations for the 2010 season in order to proactively respond to the current H1N1 crisis.  Again I find it interesting how different parts of the supply chain are experiencing such extremes.   In one supply chain, automotive, we are expecting massive plant idling and work stoppages while in another manufacturing sector, pharmaceuticals, there is a critical shortage of capacity.  If only it were possible to quickly reconfigure an automotive plant to produce flu vaccines, all of our problems would be solved…

Remains of RMS Titanic